By Stefano Rebaudo Sept 16 (Reuters) - Euro zone government bond yields edged up on Tuesday as investors stayed on the sidelines ahead of a Federal Reserve policy meeting, which could shape expectations for U.S. rates. Investors will also closely watch Thursday's policy decisions from the Bank of England and the Bank of Japan. The U.S. Federal Open Market Committee will announce its decision on rates on Wednesday. Germany’s 10-year bond yield , the benchmark for the euro zone bloc, rose 1.5 basis points to 2.71%. German investor morale rose unexpectedly in September, the ZEW economic research institute said on Tuesday. Markets expect the Fed to deliver a 25-basis-point rate cut, but market reaction is likely to hinge on the central bank’s communication, the updated "dot plot" rate projections, and any comments from Chair Jerome Powell on the conditions for further easing. "Statement language changes could tilt in a dovish direction, reflecting the recent deterioration in the labour market data," said David Doyle, head of economics at Macquarie. "Chair Powell is likely to echo his tone from Jackson Hole during his press conference and emphasize that a shift in the balance of risks warrants an adjustment to the policy rate." Markets are fully pricing in a 25-basis-point rate cut by the Fed this week, and expect 145 bps of easing by end-2026. The current federal funds target range is 4.25% to 4.50%. U.S. Treasuries were little changed in London trade, with the 10-year yield flat at 4.03%. Investors await U.S. retail sales data later in the session. Markets are pricing in a 40% chance of a 25-basis-point rate cut by the European Central Bank by June 2026 , which would bring the key rate to 1.75%. The deposit rate is seen at 1.95% by December 2026. Germany’s 2-year yields , more sensitive to expectations for ECB policy rates, were up 1 bp at 2.02%. Italian sovereign bonds were little changed after outperforming their peers the day before. Italy’s 10-year yields were up 1 bp at 3.52% after dropping 4 bps on Monday. The yield gap between safe-haven Bunds and 10-year French government bonds — a market gauge of the risk premium investors demand to hold French debt — was at 79 bps. Fitch downgraded France's sovereign credit to A+ on Friday. Analysts flagged that French OATs were already trading markedly cheaper than double-A or single-A rated peers. The spread rose above 80 basis points on Monday, up from around 65 bps a month ago, as a politically vulnerable French government headed into last week's confidence vote. (Reporting by Stefano Rebaudo, editing by Alex Richardson) ((stefano.rebaudo@tr.com)) Keywords: EUROZONE BONDS/
